Spain, Portugal step up scrutiny of soaring property markets

MADRID: Spain and Portugal are stepping up scrutiny of their soaring property markets amid early signs of overheating, but supervisors are unlikely to intervene heavily yet, with the market some way from resembling past booms and busts.

Unlike elsewhere in the euro zone, the Iberian Peninsula is seeing a real estate market boom amid strong demand and tight supply, with Spanish house prices up 12.9% year-on-year in the first quarter (Q1) and growth in Portugal at 17.8%, the highest in the EU.

Mortgage lending is also strong, with Spanish banks including Santander and BBVA competing fiercely to lend as robust consumption and high rates of immigration make Spain one of the bloc’s fastest-growing economies.

Some observers, such as Antonio Luis Gallardo of Spanish consumer group Asufin, warn that sustained house price increases raise the risk of a future correction, as demand is increasingly stretched.

Supervisors are having to balance those concerns and worries about affordability with the evidence that the economy supports the market’s strength.

Limited measures 

In Portugal, where mortgage lending rose more than 10% year-on-year in Q1, the fastest pace in over two decades, regulators are signalling or introducing some limited measures to cool the market.

On Thursday the central bank asked lenders to lower the maximum debt service-to-income ratio for new borrowers to 45% from 50%.

Supervisors in Spain are monitoring whether intensifying competition among banks could lead to looser conditions, particularly for higher loan-to-value borrowing, a senior Spanish banker said.

Mortgage lending in Spain rose 3.8% year-on-year in Q1 to €496 billion, the highest since September 2018, and the share of new mortgages with an LTV ratio above 80% has been rising, reaching 15.6% by end-2025 from 10.8% in early 2024.

Spain’s central bank received a recommendation from the IMF in March to cap loan-to-values, citing signs that mortgage lending standards were easing as the share of high LTV loans increased.

The Bank of Spain said in May it is considering limits to mortgage lending, but its governor the following month said it had no immediate plans to act, citing potential adverse effects on young people.

Scale of price growth, lending still not at pre-2008 levels

Interventions such as capping borrowing costs could be counterproductive for banks without solving the problem of limited supply, Nuria Alvarez, an analyst at Madrid-based broker Renta 4, told Reuters.

“It would be like applying a sticking plaster. Capping the price of a mortgage doesn’t mean people will be able to afford one, because if house prices keep rising at the same rate as they are, it won’t matter what the mortgage price is,” Alvarez said.

Moreover, the scale of price growth and lending is not yet at levels of the run-up to the 2008-2009 global financial crisis, when a deep downturn damaged economies for years, according to Spain’s central bank.

In Spain, the annual average LTV ratio stood at 68.4% last year, compared to 71.1% in 2016. Other metrics such as loan-to-price, loan-to-income and loan service-to-income remain well below all-time highs, official data show.

No evidence boom fuelled by credit

Maria Jesus Parra, from credit ratings agency Morningstar DBRS, said there was no evidence the housing boom was fuelled by credit, with the higher LTV percentage reflecting higher-income customers borrowing more.

“Criteria are being relaxed a little for better-off customers,” she said.

“Some lenders are willing to push LTVs higher – up to 90% or even 100% – for higher-income clients,” she added.

Spanish neobank MyInvestor offers mortgages covering up to 100% of a property, targeting households earning around €4,000 a month.

However,  in contrast to the global financial crisis, when variable-rate borrowers struggled to maintain payments, most new mortgage lending in Spain is now at fixed rates, transferring rate risks to lenders.

Adjusted for inflation, Spanish house prices in Q1 are still 12.2% below the peak reached in 2007.

Javier Diaz Gimenez, economist at IESE business school, said that unlike ahead of the 2008 crash, tight housing supply and the strong economy means there is little reason to expect prices to stop rising yet.